While it is normal for legacy, old economy players to feel threatened, the world has moved on, says K Ganesh, serial entrepreneur and partner - GrowthStory.

While it is normal for legacy, old economy players to feel threatened, the world has moved on, says K Ganesh, serial entrepreneur and partner—GrowthStory. GrowthStory is a venture builder platform and has promoted sector leaders such as Portea Medical, BigBasket, CredR, FreshMenu etc. “We are not going to go back to primitive days of not using Internet and technology and the newer mechanisms. What we need to remember is e-commerce has attracted millions of dollars in investment, has created thousands of jobs and fundamentally transformed India,” he tells Sudhir Chowdhary in a recent interaction. Excerpts:

What is your take on Indian e-commerce story? Is it still intact?

I feel that all the players in the ecosystem are swinging from unwarranted euphoria and extreme optimism, to major gloom-and doom and panic—either of these extreme reactions are not for real and do not reflect the true state of the startup scenario in India. There has been a ‘bull’ phase and sudden growth in early 2015 with more startups, new models, huge growth and hiring, high valuations, lot of capital flow…which have all seen a tempering or correction towards end of 2015, and we are likely to see more of this in 2016.

The negativity is completely unwarranted and does injustice to everyone in the ecosystem. What one needs to realise is that there are real transactions taking place, big pain-points getting solved by e-commerce, hyperlocal delivery and the great convenience of on-demand services which helps the consumer. I cannot imagine going back to an earlier life of navigating traffic, finding a parking, manoeuvring potholes and reaching a shop just to buy some stuff that’s only available in limited quantities or finding what I wanted is not available. Online shopping has made it possible to solve this. Similarly, days of negotiating and begging an auto rickshaw driver or taxi driver, are over thanks to Uber and Ola.

Are doomsayers wrong in pressing the panic button? Is it really a bubble?

Everyday, tens of thousands of users are buying their daily groceries from Bigbasket, having their retail needs fulfilled by Amazon/Flipkart, food from Freshmenu, healthcare from Portea— and paying for it. This shift is real and there is no going back. This is not about the earlier dotcom days—where it was all about page views, eye balls and users; now it is real transactions and payments happening every day. So there is no bubble. Now as far as questions such as is the valuation right? Is so much of capital inflow sustainable? What is the steady-state situation, etc are all valid questions but these questions do not make it a ‘bubble’ or warrant the need for any panic.

The so called “gloom-and-doom” that an entire spectrum of media and pundits are speaking about is not so bad as to warrant these extreme reactions. The actual layoffs in the sector, while very tough on the individual involved, are a minuscule portion of the new jobs this sector has created.

Are some startups in India overvalued especially some of the so-called, unicorns?

Most players agree that there has been a run-up in the valuations of companies over 2015. But we should not get confused between intrinsic value of a company and price of a stock. Intrinsic value is a function of several core and fundamental aspects of the company, the sector and the business model. Price on the other hand, is a function of demand and supply. During a bull phase, if there is more demand for a category-leader or a sector-leader in an emerging, large, under-penetrated economy like India, then there will be more buyers for a company stock and this will drive up the price.

On the other hand, due to factors such as global stock market prices, the slowing Chinese economy etc, if there is lack of appetite for Indian private company stock, then demand will be low and the price will reduce. Neither the euphoria nor the gloom-and-doom sentiments change the intrinsic value. Unless there is a market transaction like an external fund-raise, we would not be able to determine the right price. Till then this type of ‘devaluation’ or ‘mark down’ is fund-specific and not a reflection on the fair value.

What is the view we should take of the sector then?

I think, we should see it in full perspective. People are attaching too much significance to the mark down by Morgan Stanley now, and Fidelity, earlier, with their holdings in private companies. Both MS and Fidelity need to present a NAV of their fund and fairly reflect their value and so decided this, using their own valuation methods on fair value.

It is important to understand that it does not reflect the market value as an actual transaction is not taking place at that price. While this markdown may reflect the sentiments and acknowledgement of the “bear” phase, it is but nothing more. The same stock may get valued very differently if other companies start valuing and reflecting their private holdings. Specific price at which the company raises the funding in particular rounds may vary and there will be some corrections based on demand-supply and bull-bear cycles.

The other important consideration is that valuation for unlisted, early-stage or even growth-stage tech companies is not an exact science. You cannot apply the models used in traditional businesses or businesses that are in maturity or steady growth stage. If you add the power of disruption, either through technology, virality or network effect, as well as ‘greed’ and ‘FOMO,’ and uncertainty and the overall momentum effect in a rising bull market, valuation becomes an art!

Food start-ups in India seem to be facing tough times, recently. What are some of the challenges they face?

For companies that have a food delivery/aggregator model, the biggest issues are that the business model is broken. You cannot make unit economics work as customers don’t pay for delivery and therefore the order value has to be large enough to make delivery profitable. Cost of customer acquisition is high. The demand is very seasonal and it peaks heavily in the evenings and on weekends and demand over the rest of the week maybe, low.

For full-stack food companies the product has to be great, and consistently of good quality. This is quite to achieve at a scale. Very few companies like Domino’s and Freshmenu have been able to crack this. If people don’t ‘salivate’ when they think of a brand, the business is dead even before it is born. Discounts, cash backs, technology, app design are all secondary to food taste. The real estate cost is very high in India to make a restaurant business model to work. So, an Internet-only restaurant or restaurant-on-a-cloud is a good model—provided the average order value is above R400 to justify the delivery cost.

How will the impact of the recent policy on 100% FDI in e-commerce marketplaces affect the e-commerce sector?

It is always good to have clarity and clear guidelines. While this announcement reiterates what was already prevalent and clarifies some points, it’s still too early as information is still coming through. As of now, it appears the policy allowing 100% FDI in pure market places versus inventory-led models, cap on the maximum amount that can be sold by one entity on a marketplace, pricing policy and discounts etc, has created more uncertainty and ambiguity. I am sure these will become clear as time goes by.

E-commerce is fundamentally more efficient than offline retail. It also creates transparency and removes wastage and additional layers and thereby benefits the consumers. And we should stop spending too much time focusing on the needs of the offline retail lobby.

What we need to remember is e-commerce has attracted millions of dollars in investment, has created thousands of jobs and fundamentally transformed India. These startup founders managed to take all the risk, convinced known people to part with risk-capital they had legally earned, and launched and grew their ventures into large companies. These ventures have fulfilled needs for a large and growing number of people. We should applaud these founders and companies, celebrate their spirit, have them share their valuable learnings and do all we can to empower them and allow them to build their business.

While it is normal for legacy, old economy players to feel threatened, the world has moved on. We are not going to go back to primitive days of not using Internet and technology. In today’s scenario can you imagine any of us standing in a queue in an airline counter to buy a ticket or go to a travel agent office because we want to book a travel ticket or a hotel? Or, standing in queue at a bank branch so that you can get a cheque book issues or withdraw cash? There are far better ways to go about our lives than wasting time and money hanging onto legacy systems and outdated ways of doing things and fearing technology.